Tax on Cryptocurrency Income

There are two driving factors behind tighter cryptocurrency regulations. The first is tax collection, obviously. Thousands of investors have made profits worth millions in the cryptocurrency markets.

Early investors have gained the most. The price of the currency went from a few hundred dollars in 2013 to nearly $10,000 in 2017. Yet there have been little to no taxes paid on these gains. The government can tolerate many things, but tax evasion is not something they are looking to let slide past them.

The second factor for major regulations is the pressure from big banks. The established institutions are not happy about the new digital markets that are driving investment money away from their hands. Some of the most vocal critics of blockchain and cryptocurrency have been major investment banks.

These banks have deep pockets and a strong lobby in government circles. Anything that poses a threat to their interests, whether it is stricter regulations on the stock markets or an alternative financial market is quickly dismantled through political power.

There is a third reason as well that is often touted by the agencies as the rationale for the new policies; scams and fraudulent ICOs in the crypto markets. Policies implemented by the government so far suggest that they are looking to target the whole market rather than just the shady practices.

The Tax Calculations

The 17th of April has been set as the tax deadline for cryptocurrencies. The IRS identifies cryptocurrencies as tangible assets similar to gold or investment property. Tax principles that apply to such investments are also applicable to crypto.

In order to calculate the tax payable, the IRS uses a simple formula;

Sale price – Cost basis = Gain/Loss.

This method is useful for coins that have been sold by traders.

In a case where coins are still held by a trader, the fair market value of the currency is considered. This can be calculated by the formula;

Fair market value – Coin basis = Gain/Loss.

Taxes on Purchases Made With Cryptocurrency

The IRS has stated that it doesn’t matter whether cryptocurrency is sold for money or used to purchase another asset. In both cases, the coin is considered to have been sold as normal. Any gain in value from the cost basis is treated as profit and taxable in the same way that a normal gain is taxed.

Suppose you purchased a Bitcoin for $10,000. Soon afterward, the price appreciates to $12,000. You purchase $12,000 worth of Ethereum in exchange for the coin. Since you have made a gain in value of $2,000, you are not liable to pay taxes on the $2,000. This holds true even if you haven’t converted the coins back into dollars.

It is mandatory to keep a record of your transactions when trading in cryptocurrency. The IRS has put the responsibility on the taxpayer to make sure that their gains are properly accounted for and taxes are paid. Failure to do so can result in being charged the highest tax rate as well as penalties and fines.

Taxable events take place every time you trade-in cryptocurrency and make a gain. If you are a regular crypto trader, it is very important to keep a record of all transactions to calculate total gains and losses.